Norfolk Misses, Outlook Bright - Analyst Blog

After the closing bell on January 25, Norfolk Southern Corp. (NSC), the leading U.S. railroad company, reported its fourth quarter of 2010 financial results. Although overall results missed the Zacks Consensus Estimates, Norfolk provided a bright 2011 financial outlook and also raised its dividend rate significantly. As a result, in after-market trade on NYSE, share price of Norfolk was up 39 cents (0.62%) to $63.31.

Adjusted fourth quarter 2010 earnings of $1 per share fell below the Zacks Consensus Estimate by $1.05. However, GAAP net income was $402 million or $1.09 per share compared to a net income of $307 million or 82 cents per share in the year-ago quarter.

Fourth-quarter 2010 results benefited from a $34 million, or $0.09 per diluted share gain attributable to a change in estimate affecting deferred income taxes.

Total revenue improved 14% year over year to $2,392 million, owing to higher traffic volume (up 15%) as a result of a surge in demand for coal. However, total revenue missed the Zacks Consensus Estimate of $2,425 million. Norfolk enjoyed increases of 10% in General Merchandise revenues, 18% in Coal revenues and 16% in Intermodal revenues.

Despite Norfolk's efforts to control costs, operating expenses increased 12% year over year driven by higher compensation and benefit expenses as well as higher fuel costs. Operating ratio improved 100 basis points to 74.2% from 73.2% in the year-ago quarter.

Cash Position

At the end of fiscal 2010, Norfolk had cash and cash equivalents, including short-term investments of $1.11 billion compared with $1.1 billion at the end of fiscal 2009.

Dividend

Norfolk has raised its quarterly dividend by 11% to 40 cents per share from 36 cents per share. Management cited strong business momentum as the primary reason for this revised dividend. The dividend will be paid on March 10 to shareholders of record on Feb 4, 2011.

Recommendation

Norfolk competes with other class 1 freight railroads such as Union Pacific Corp. (UNP) and CSX Corp. (CSX) to name a few. We maintain our long-term Neutral recommendation on Norfolk. Currently, it is a short-term Zacks #3 (Hold) Rank stock.

 
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